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By: Ady Pangestu
Rapid and consecutive responses to fiscal and monetary assistance have helped partial recovery of financial assets related to the coronavirus crisis. However, an increase in the number of cases and actions to suspend easing pose a challenge for the Fed.
The Fed at their previous meeting signaled that they are ready to take more action to ensure the recovery can take place. Unusual policy moves have included large-scale liquidity injections, cutting interest rates to zero, buying more than $2 trillion in Treasury and Mortgage Backed Securities and implementing numerous credit easing programs in various markets.
What was done by the Fed has given confidence to the asset markets to determine prices effectively in the form of a “V”-shaped recovery, thus far. You can see that almost all equity markets have pared losses and the spread of corporate bonds has narrowed sharply.
However, at the same time, the increase in allowances of US $600/week to 31.8 million claimants will end this week, and will likely be replaced by a smaller amount. This will be a decrease in income for most workers when unemployment appears to be rising again due to the suspension of easing, due to the development of new outbreak cases.
The Fed will most likely maintain their cautious language on recovery and will leave the Fed funds target level unchanged at 0-0.25% without a change in their QE attitude. The Fed funds target interest will likely be kept at 0-0.25% for a very long time, until it is certain that the economy has passed recent events and is on the right track to achieve maximum employment and maintain price stability. This was the Fed’s previous commitment, and it is likely that this time it will be the same and they will continue to purchase bonds at the current pace to maintain the smooth functioning of the market, thereby encouraging effective monetary policy transmission to broader financial conditions.
With a functioning market and longer yields at such low levels, the Fed doesn’t need to change its attitude much at this stage.
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